Written by Steven Hansen
Non-seasonally adjusted Case-Shiller home price index (20 cities) for January 2012 (released today) shows a month-over-month decline of 0.8% and a year-over-year decline of 3.8%. This is the lowest January price index level since 2002.
The market expected a year-over-year decline of 3.8% to 4.0% decline vs the 3.8% actual.
There is some evidence in various home price indices that home prices are beginning to stabilize – the evidence is in this post including the caveats below. Please see the weekly post Economic Headwinds from Real Estate Moderate.
Data through January 2012, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed annual declines of 3.9% and 3.8% for the 10- and 20-City Composites, respectively. Both composites saw price declines of 0.8% in the month of January. Sixteen of 19 MSAs also saw home prices decrease over the month; only Miami, Phoenix and Washington DC home prices went up versus December 2011. (Due to delays in data reporting, the January 2012 index values for Charlotte are not included in this month’s release). Eight MSAs and both Composites posted new index lows in January. The 10- and 20-City Composites recorded marginal improvements in annual returns over December 2011 when they each posted -4.1%.
In addition to the Composites, Dallas, Denver, Miami, Minneapolis, New York, Phoenix, San Diego, Seattle, Tampa and Washington DC saw their annual rates improve compared to December; while nine of the MSAs saw their annual returns worsen compared to what was reported for December 2011. Denver, Detroit and Phoenix were the only cities to post positive annual growth rates of +0.2%, +1.7% and +1.3%, respectively. again posted the lowest annual (and only double-digit negative) return at -14.8%.
Comparing all the home price indices, it needs to be understood each of the indices uses a unique methodology in compiling their index – and no index is perfect. The National Association of Realtors normally shows exaggerated movements which likely is due to inclusion of higher value homes.
A synopsis of Authors of the Leading Indices:
Case Shiller’s David M. Blitzer, Chairman of the Index Committee at S&P Indices, sees some general weakness in the data.
“Despite some positive economic signs, home prices continued to drop. The 10- and 20- City Composites and eight cities – Atlanta, Chicago, Cleveland, Las Vegas, New York, Portland, Seattle and Tampa – made new lows. Detroit and Phoenix, two cities that have suffered massive price declines, plus Denver, saw increasing prices versus January 2011. The 10-City Composite was down 3.9% and the 20-City was down 3.8% compared to January 2011.
“Due to delays in reporting for Mecklenburg County, we did not publish a January index level for Charlotte, North Carolina. There was not enough January data to publish an accurate index level this month. We are not sure of the reasons for the delays, but do expect to see the data with next month’s release. We did include data we received from Gaston County, NC, and York County, SC, in the calculation of the 20-City Composite.
“Atlanta continues to stand out in terms of recent relative weakness. It was down 2.1% over the month, and has fallen by a cumulative 19.7% over the last six months. It also posted the worst annual return, down 14.8%. Seven of the cities were down by 1.0% or more over the month. With the new lows, both Composites are now 34.4% off their relative 2006 peaks.”
CoreLogic’s Mark Fleming, chief economist commenting on its January data, suggests distressed sales are continuing to put downward pressure on prices:
“Although home price declines are slowly improving and not far from the bottom, home prices are down to nearly the same levels as 10 years ago.”
Lawrence Yun, NAR chief economist commenting on February 2012 data said the market is improving unevenly – but there is light at the end of the tunnel.
“The market is trending up unevenly, with record high consumer buying power and sustained job gains giving buyers the confidence they need to get into the market,” he said. “Although relatively unusual, there will be rising demand for both rental space and homeownership this year. The great suppression in household formation during the past four years was unsustainable, and a pent-up demand could burst forth from the improving economy.”
“Falling visible and shadow inventory, combined with a dearth of new-home and apartment construction during the past three years, assure that rents will continue to rise, with likely home price increases in 2012,”
Lender Processing Services (LPS) in December 2011 saw a decline of 1.0% month-over-month.
LPS also announced that beginning next month (transactions of January 2012), the report will be based on an updated view of market structure. “Following the real estate bubble, the proportion of short-sale transactions is much higher than historically observed. Other HPI suppliers have not updated their analyses in the face of increased short-sale transactions. Identifying and correctly accounting for short-sale price discounts produces an HPI that better represents non-distressed sales,” said Raj Dosaj, vice president of LPS Applied Analytics.
Rather than believing the housing decline is picking up pace, Scott Sambucci from Altos Research is seeing market stabilization in January 2012.
At the end of January 2012, most metro markets saw stable pricing and several are ticking up, as inventory dropped for the beginning of the year. Stable pricing in January, where prices can be expected to seasonally drop, points to a bullish start in the New Year. In parallel with the market of homes for sale, we have observed strength in the rental market. (Altos Research now tracks nearly one million rental units, their pricing and availability each month.) The following chart illustrates the correlation of home prices and rents across the country as of January 27, 2012.
Econintersect publishes knowledgeable views of the housing market.
Caveats on the Use of Home Price Indices
The housing price decline seen since 2005 varies by zip code. Every area of the country has differing characteristics. Since January 2006, the housing declines in Charlotte and Denver are well less than 10%, while Las Vegas home prices have declined almost 60%.
Each home price index uses a different methodology – and this creates slightly different answers. However, all are in concert saying that home prices are continuing to decline.
The most broadly based index is the US Federal Housing Finance Agency’s House Price Index (HPI) – a quarterly broad measure of the movement of single-family house prices. This index is a weighted, repeat-sales index on the same properties in 363 metro centers, compared to the 20 cities Case-Shiller. However, this index is updated through 4Q2011.
The red line is the HPI index divided by the Consumer Price Index (CPI-U). This division approximates chained dollar look at home prices. Home prices remain 20% above their pre-bubble price levels. In other words, home prices need to fall another 20% to get into the price range enjoyed in the 1980′s – before the effects of the Baby Boomer/credit expansion home price bubble.
Based on US Federal Housing Finance Agency’s House Price Index (HPI) – home price degradation seems to have paused.
Recent review of the Fed 2011 stress tests for banks has a new recession scenario that would see home prices decline another 20% from here. It is unlikely that the attempts to complete a bottom here could hold under those conditions.
Econintersect analysis of recession indicators is still not seeing the start of new U.S. recession, however. We can only hope that outlook continues.
One area that has been absent from discussion of home prices recently is the affordability factor. After hearing about how affordable home purchasing had become earlier in the year, the optimism on that front has waned. At the beginning of the year an article at CNN/Money by Nin-Hai Tseng quoted Moody’s Mark Zandi as part of what she wrote:
After declining during the depths of the latest recession, prices for rentals nationwide increased modestly by about 3% in 2010, partly driven by a record number of homeowners looking for new digs after foreclosing on their homes. In Moody’s latest list of rent ratios (which is the price of a typical home divided by the annual cost of renting that home) for 54 U.S. metropolitan areas, 39 fell into the ‘better to rent’ category — roughly the same level it’s been for the past year.
But that may finally be about to change. Moody’s chief economist Mark Zandi expects the trend to reverse this year in many major cities. This would be a positive development, as a healthy housing market typically puts renting and owning at more equal footing.
“By mid 2011 and certainly by end of 2011, buying will be superior to renting in most parts of the country,” Zandi says.
A few factors will be at play. For one, home prices are expected to fall further, with some economists expecting a 15% to 30% drop this year. This might be bad news for household finances and current homeowners fearing that their most prized asset stands to lose more in value. On the flip side, this makes homes more affordable and might finally spur more home sales, especially at a time when the rate of home construction has been the lowest since before the Second World War.
It turns out that home prices have declined of the order of 3% in 2011, not up to 30% suggested just eleven months ago. It is still much more beneficial on a cost basis to rent (national average C-S Comp 20) than to buy, as shown in the graph from Calculated Risk.